Santander Bank Annual Report 2011 Economic and financial review 2011

1. Economic and financial review
78

2. 80 Consolidated financial report
99 Information by segments
100 1. Principal segments or geographic areas
136 2. Secondary segments or by business
79

3. Economic and financial
review
General background Mexico showed considerable resistance to the international
The global economy continued to slowdown, due to worsening financial turbulence and weakening of the global economy.
of European sovereign debt crisis and a fall in confidence, with Based on figures for the first nine months (+4.5% year-on-year
new episodes of uncertainty as of the summer which, sparked growth in the third quarter), GDP growth for the whole year
tougher funding conditions. This scenario was partly offset by a was around the potential rate of 4%. This was due to industrial
general softening of monetary policy: injections of liquidity in the output, investment and the recovery in lending to the private
case of the European Central Bank, a prolongation of low interest sector, particularly consumer credit, which is expected to
rates in the US and cuts in official interest rates in Latin America. remain solid in coming quarters despite the external
uncertainties.
The US economy grew 1.7%, after growth of 2.8% annualised
in the fourth quarter, which helped to offset part of the drop in The good activity growth, moderate inflation (3.4% average in
growth in the first half of 2011. This growth, basically due to 2011), which remained within the Bank of Mexico’s target
investment in equipment and the external sector, gradually gave range (2%-4%), and an external position favoured by higher oil
way to greater participation of consumption and investment in prices enabled the central bank to hold its key interest rate at
non-residential construction, which will remain in coming 4.5%, keeping its leeway. The peso depreciated during the year,
quarters and put the growth rate at around its potential. after ending the year at MXN 13.95/$1, the result of
international financial tensions in the second half of the year.
The impact of oil prices and greater use of installed capacity
raised inflation to more than 3% in the middle of the year. The Chilean economy grew 6.3%, partly due to the weakness in
However, the underlying rate remained under control at around the beginning of 2010 following the earthquake. Growth was
1.5%, enabling the Federal Reserve to maintain a very on a downward trend, more so in the second half of the year
accommodating monetary policy in favour of growth and re- because of international tensions, which is expected to continue
establish the interbank market. because of a weaker external environment and flagging private
consumption.
Latin America kept up good growth rates for the year as a
whole, although lower than in 2010. In the second half the Inflation remained under control (3.3% average), enabling the
impact of the downturn in the global economy and the drop in central bank to stop raising interest rates in the second half of
raw material prices began to be felt. In order to counter the the year (+200 b.p. between January and June to 5.25%). The
impact on growth, some central banks began to soften their spurt in inflation in the last part of the year (4.4% in December)
monetary policies, which is still going on. This strategy is likely to is considered temporary, which would allow the central bank to
be replicated by other central banks during 2012. maintain leeway for softening monetary policy and fostering
growth, as reflected in January when it cut the rate by 25 b.p.
Brazil’s growth eased to 3.0% from 4.2% year-on-year in the to 5%. The peso, like other main currencies in the region,
first quarter and subsequent deceleration, which reached a low depreciated, ending the year at CLP 519/$1.
in the third quarter. The downturn led the central bank to begin
to gradually cut the Selic rate from 12.50% in September to The euro zone grew 1.6% in 2011. After a robust start, activity
10.50% in January 2012, a trend that will continue in the slowed due to risks appearing that threatened the recovery
coming months. (greater than envisaged impact of the rise in raw material prices
and Japan’s earthquake), coupled with, in the second half of the
A softer monetary policy and buoyant domestic demand, backed year, management of the sovereign debt crisis that did not
by a solid labour market (jobless rate at its lowest, less than 5%), convince the markets. Fourth quarter GDP shrank 0.3%, a fall
will continue to fuel growth. Inflation remained high (6.5% in expected to carry on into early 2012.
December) and in some months above the central bank's target
(4.5+2%). As regards the currency, the evolution of interest rates in Inflation remained above the ECB’s target throughout the year
the second half of the year and the measures to control an (2.7% vs. 2%) and in December began a downward path (from
excessive appreciation of the real produced a depreciation for the 3.0% to 2.8%) that could see inflation moving towards the
year as a whole. The real ended 2011 at BRL 1.87/$1 (BRL 1.66/$1 target.
in 2010).
80 ANNUAL REPORT 2011

4. In this context of sharp slowdown and uncertainty, the ECB Summary of 2011 for Grupo Santander
undid in the fourth quarter the two rises in its rates carried out Grupo Santander registered attributable profit of EUR 5,351
in the first half of the year (from 1.0% to 1.5%) and ended million in 2011, a decline of 34.6% from 2010. Profit would
2011 with a repo rate of 1%. Furthermore, it re-established have been EUR 7,021 million, a decline of 14.2%, if the bank
unconventional liquidity facilities and in December made a new had not made pre-tax provisions in the fourth quarter against
auction (3 years without a volume limit) which will be repeated property exposure in Spain of EUR 1,812 million and a pre-tax
in February 2012. The intensified tensions in the euro zone and amortisation of EUR 601 million from goodwill related to
the slower growth caused the euro to gradually weaken against Santander Totta. The bank also applied net capital gains of EUR
the dollar and end the year at EUR 1/$1.29 (EUR 1/$1.34 in 1,513 million realised in 2011 to other provisions.
2010).
In an environment that was once again complex in many
There are significant divergences and prospects in the euro markets where it operates, Santander continued to prove the
zone. The worst countries are the so called peripheral ones, robustness of its business model, which is adapted to the
which face a greater loss of confidence and high funding costs various markets and environments. Differentiated management
combined with the shrinkage effect of fiscal adjustment policies. enables Santander to generate high recurring profits, while
Germany, on the other hand, is in a better situation, with GDP improving, at the same time, the Group’s positioning for the
growth of 3.0% in 2011 and an unemployment rate of 6.8%, coming years.
the lowest rate since 1991. However, like the euro zone, fourth
quarter growth shrunk 0.2% which could be corrected in the The pillars of Santander’s model are the focus on the customer
short term. and on commercial business, geographic diversification, the
continuous striving to improve efficiency, prudence in risk and
The Spanish economy expanded 0.7% in 2011, fuelled by discipline in capital and liquidity. All of this enhanced by the
exports, which offset the weak domestic demand. Growth Santander brand, which is recognised as one of the world’s
slowed and GDP contracted 0.3% in the fourth quarter, due to leading financial brands.
anaemic consumption. The continuation of these trends,
combined with the impact of the large deficit reduction process, The key points in 2011 were:
point to a return to recession, according to all forecasts. In this
context, inflation, which remained high (3.2% average), largely 1) Solid generation of recurring profits. In the last few
due to higher energy prices, fell significantly in the last part of years Grupo Santander has been able to keep on increasing
the year (2.4% in December). its revenues which, as well as setting us apart from the
sector, enabled net operating income (pre-provision profit) to
The UK showed similar growth levels and profiles: +0.9% for the continue to grow and reach EUR 24,373 million in 2011.
whole of 2011 and shrinkage in the fourth quarter (0.8%
annualised). This reflected the worsening international financial This figure makes Santander one of the best banks in the
and trade situation, and weak domestic demand, which is world in these terms. It also shows an excellent evolution
expected to continue in coming quarters, although partly offset during the four years of the crisis, as profits before provisions
by a more stable labour market. amounted to EUR 90,000 million.
Inflation was high throughout the year (4.5% average) but on a This capacity to generate such results makes the income
downward path (4.2% in December as against 5.2% in statement very solid and gives it a substantial cushion for
September) which will continue in 2012. The Bank of England, absorbing provisions in the most demanding environments.
which held its base rate at 0.5%, increased its programme to The 2011 income statement continues to reflect the
buy bonds by £75,000 million in October, which was added to diversification and management focuses adapted to each
the £200,000 million already acquired. Sterling appreciated market:
against a euro weakened by the sovereign debt crisis to £1/EUR
1.20 (£1/EUR 1.16 in 2010). – By areas, growth in net operating income in emerging
markets (Latin America and, in local criteria, Poland). There
was also an increase in the units of developed countries
where the macroeconomic environment is still weak but
the units are benefiting from the business moment (US
and consumer business, ahead in the cycle). All of this is in
stark contrast to the sharp fall in profits in markets such as
Spain and Portugal, hard hit by intense deleveraging, as
well as the lower level in the UK which was very affected
by the cost of regulatory impacts.
– By lines, of note was the growth in revenues (+5.3%). Net
interest income and net fees increased at a good pace in a
scenario of lower activity in developed markets, very low
interest rates and upward pressure of funding costs. On
the other hand, the negative impact of gains on financial
transactions of the operating areas, especially in Global
Banking and Markets.
ANNUAL REPORT 2011 81

5. – Total operating costs increased 9.3%, reflecting a management model, together with the capacity to assign
differentiated management on the basis of markets and profits to provisions, make the evolution of the credit quality
businesses. Most of the rise was due to capture growth in ratios compare very well with those of other banks in the
emerging markets. The efficiency ratio was 44.9%, the main countries where we operate.
best among comparable banks.
This led to the Group’s NPL ratio stabilising in the last two
2) Effort in provisions to strengthen the balance sheet. quarters. It ended 2011 at 3.89% and coverage was 61%.
As well as the recurring profits, Grupo Santander decided to
realise provisions net of taxes of EUR 3,183 million, of which 4) Strengthening the capital position. Grupo Santander
EUR 1,513 million were drawn from capital gains and EUR once again displayed its financial strength and flexibility by
1,670 million from the fourth quarter profits. anticipating compliance with the European Banking
Authority’s capital requirement, which has to be reached by
The bank charged EUR 1,812 million pre-tax provisions against June 2012. The Group was able to carry out various
the fourth quarter earnings to cover real estate exposure in measures to raise its core capital ratio from 7.53% to 9.01%,
Spain and EUR 601 million in pre-tax provisions to amortise in accordance with the EBA’s criteria.
goodwill related to the businesses in Santander Totta.
At the same time, the increase in the last quarter meant that
Moreover, net capital gains of EUR 1,513 million generated in the core capital ratio, in accordance with the BIS II
2011 were also assigned to provisions, including charges international standard, rose by 122 b.p. to 10.02% from
against investment portfolios of EUR 620 million, and 8.80% in December 2010. For the fifth year running, the
amortisation of intangibles and contributions to pensions and Group improved its solvency.
other contingencies of EUR 893 million.
5) Solid funding structure and liquidity ratios. After a year
The aforementioned provisions made for real estate risk of tensions in the markets, particularly in the second half,
pushed up coverage of foreclosed properties in Spain to Santander managed to maintain a solid liquidity position,
50%, while coverage of doubtful and substandard loans with thanks to its considerable capacity in the retail market via its
a real estate purpose was also improved (33% and 16% branches, and its broad and diversified access to wholesale
respectively). markets via its model of subsidiaries. Another factor at play in
the current context is deleveraging in some markets.
These increases in coverage anticipated part of the new
requirements outlined in the Royal Decree 2/2012 which The loan-to-deposit ratio ended 2011 at 117% compared to
came into force on February 3, to increase provisions for real 150% at the beginning of the crisis in 2008.
estate assets in the Spanish financial system.
Moreover, the Group maintained in 2011 a very conservative
In the case of Grupo Santander, such requirements amount policy in medium- and long-term wholesale issues. The
to EUR 6,100 million, and will be entirely met in 2012, as volume issued was higher than the maturities during the
follows: year.
• EUR 1,800 million already charged against 2011 results. 6) High shareholder return. The total shareholder
remuneration was EUR 0.60 per share, including the scrip
• EUR 2,000 million are a capital buffer required by the rules dividend, thereby maintaining the remuneration for the last
and already covered by the capital surplus held by the two years.
Group.
7) Better positioning of the Group. In the last few years,
• The remaining EUR 2,300 million will be covered through Santander has continued to combine organic growth
capital gains which may be obtained during the year initiatives in key countries with active management of the
(including EUR 900 million from the capital gain obtained business portfolio, enabling it to end the year in a more
from the sale of Banco Santander Colombia) and through diversified position and with greater future growth potential.
ordinary contributions to provisions during 2012.
During 2011, some of the pending agreements announced at
3) High level of credit quality. Grupo Santander’s risk
Exchange rates: 1 euro / currency parity
2011 2010
Year-end Average Year-end Average
$ 1.2939 1.3903 1.3362 1.3228
Pound sterling 0.8353 0.8675 0.8608 0.8570
Brazilian real 2.4159 2.3244 2.2177 2.3262
New Mexican peso 18.0512 17.2523 16.5475 16.6997
Chilean peso 671.3400 672.0923 625.2748 673.9214
Argentine peso 5.5686 5.7445 5.3074 5.1737
Colombian peso 2,509.5191 2,568.6527 2,565.5040 2,507.2221
Uruguayan peso 25.8133 26.7630 26.5904 26.4588
Polish zloty 4.4580 4.1105 3.9750 3.9931
82 ANNUAL REPORT 2011

6. the end of 2010 materialised and other operations were Rating agencies
carried out to increase and restructure the Group’s presence The Group’s access to wholesale finance markets, as well as the
in emerging countries and developed with great potential for cost of issues, depend, to some extent, on the ratings given by
Santander. rating agencies.
As regards the Group’s incorporations, the acquisition of the These agencies regularly review the Group’s ratings. The long-
Polish bank BZ WBK was completed (it began to consolidate term debt rating depends on a series of endogenous factors
in the Group in the second quarter), as well as of the retail (solvency, business model, capacity to generate profits, ...) and
business of Skandinaviska Enskilda Banken (SEB Group) in other exogenous ones related to the general economic
Germany, which entered the Group in the first quarter. environment, the sector’s situation and the sovereign risk of the
countries in which it does business.
The transaction with the insurer Zurich was also completed in
order to reorganise bancassurance business in Latin America Since autumn the difficulties in resolving the problems of
and new partners entered the capital of Santander Consumer European countries, which have required financial assistance,
USA, where the Group holds a 65% stake. together with worsening of the euro zone’s growth
expectations, have produced a fall in confidence and a rise in
These operations together with the economic cycle in the tensions on European sovereign debt. This situation led to a
various geographic areas, increased the contribution of widespread and significant downgrading of the sovereign
emerging countries up to 54% of the operating areas ratings of many European countries, which, in turn, resulted in
attributable profit. actions on the rating of their banks.
Lastly, agreement was reached to sell the subsidiary in Between October 2011 and February 2012, the Kingdom of
Colombia, which will probably be completed during the first Spain’s credit rating was cut one notch by DBRS from AA to AA
half of 2012. This sale will generate capital gains of around (low), three by Standard & Poor’s (from AA to A) and four in the
EUR 615 million, which will also be assigned to strengthening case of Moody’s (from Aa2 to A3) and Fitch (from AA+ to A),
the balance sheet. maintaining the negative outlook in all of them.
As regards the main segments (geographic), the main These movements led to a review of Banco Santander’s ratings,
developments were: which in February 2012 were as follows:
• Continental Europe: attributable profit was 15.1% lower at
EUR 2,849 million, hard hit by the low growth environment
and deleveraging and low interest rates, as well as the Rating Agencies
negative impact of gains on financial transactions and fee
income. Profits fell at the three commercial networks and at Long Short Stand-
wholesale businesses, while Santander Consumer Finance term term alone Outlook
performed well (+51.5% in attributable profit) and Poland’s
Standard & Poor’s A+ A-1 a Negative
BZ WBK was incorporated to the Group in April.
Fitch Ratings A F1 a Negative
• United Kingdom: attributable profit of EUR 1,145 million Moody’s Aa3 P1 B- Negative
(£993 million), 41.0% less than in 2010 in local currency. The DBRS AA (low) R1(medium) Negative
income statement was very affected by the environment of
low activity, low interest rates, regulatory changes, higher
funding costs and the PPI charge. On the other hand, costs
were almost flat and fewer provisions were made, reflecting Lastly, after its latest review, Standard & Poor’s put Banco
the good evolution of non-performing loans. Santander’s long-term rating one notch above the Spanish
sovereign credit rating. Fitch and DBRS give the Bank the same
• Latin America: attributable profit of EUR 4,664 million, rating as the Kingdom of Spain, and following the recent
similar to 2010 without the impact of exchange rates, thanks downgrading by Moody's of Spanish sovereign debt the Bank’s
to the dynamism of net interest income and fee income, rating is three notches above that of the Kingdom of Spain. At
which lifted gross income by 9.5%. This offset the higher the date of publication of this report, Moody’s was reviewing
costs from investments, the pressure of inflation on salaries Banco Santander’s rating.
and higher provisions.
• Sovereign: attributable profits of EUR 526 million ($732
million), 30.3% higher in local currency than in 2010.
Revenues and provisions performed well and costs rose
because of investments in technology and commercial
structures.
ANNUAL REPORT 2011 83

7. Grupo Santander generated an attributable profit of EUR 5,351
Grupo Santander. Results million, 34.6% less than the EUR 8,181 million posted in 2010.
Earnings per share (EPS) were EUR 0.6018 (-36.1%).
Solid profit generation: the Group generated over
EUR 24,000 million in net operating income for the The following factors need to be taken into account in order to
first time ever (pre-provision profit), improving for the interpret the results appropriately.
ninth year running.
• In the second half of the year, the economic environment
Big effort to strengthen the balance sheet: deteriorated considerably, which is leading to lower global
extraordinary provisions of EUR 3,183 million net of growth.
tax, of which EUR 1,513 were capital gains and EUR
1,670 million fourth quarter profits. • In the fourth quarter the bank made provisions for EUR 3,183
million net of tax, of which EUR 1,513 million came from
Recurring profit amounted to EUR 7,021 million,
capital gains and EUR 1,670 million from fourth quarter
14.2% less than in 2010:
profits (EUR 1,812 million gross) to be assigned to real estate
• Gross income rose 5.3% reaching historic highs, provisions in Spain, and EUR 601 million for the amortisation
withstanding the cycle in mature markets and of Santander Totta's goodwill.
recovering in emerging ones.
• In addition, the profit reflects a one-off charge in the second
• Differentiated management of costs by unit. quarter of EUR 620 million (£538 million) net of tax from a
• Loan-loss provisions increased 3.0% due to the provision made in the second quarter related to Payment
lower release of generic ones, as specific provisions Protection Insurance (PPI) remediation in the UK.
were 9.8% lower.
Income statement
Million euros
Variation
2011 2010 amount % 2009
Net interest income 30,821 29,224 1,597 5.5 26,299
Dividends 394 362 32 8.9 436
Income from equity-accounted method 57 17 40 235.1 (1)
Net fees 10,471 9,734 737 7.6 9,080
Gains (losses) on financial transactions 2,500 2,606 (106) (4.1) 3,423
Other operating income/expenses 18 106 (88) (82.8) 144
Gross income 44,262 42,049 2,213 5.3 39,381
Operating expenses (19,889) (18,196) (1,694) 9.3 (16,421)
General administrative expenses (17,781) (16,256) (1,525) 9.4 (14,825)
Personnel (10,326) (9,330) (996) 10.7 (8,450)
Other general administrative expenses (7,455) (6,926) (528) 7.6 (6,374)
Depreciation and amortisation (2,109) (1,940) (169) 8.7 (1,596)
Net operating income 24,373 23,853 519 2.2 22,960
Net loan-loss provisions (10,562) (10,258) (304) 3.0 (9,484)
Impairment losses on other assets (173) (471) 298 (63.4) (402)
Other income (2,822) (1,072) (1,749) 163.1 (1,311)
Profit before taxes (w/o capital gains) 10,817 12,052 (1,235) (10.2) 11,764
Tax on profit (2,936) (2,923) (12) 0.4 (2,336)
Profit from continuing operations (w/o capital gains) 7,881 9,129 (1,248) (13.7) 9,427
Net profit from discontinued operations (24) (27) 3 (9.3) 31
Consolidated profit (w/o capital gains) 7,857 9,102 (1,245) (13.7) 9,458
Minority interests 836 921 (85) (9.2) 516
Attributable profit to the Group (w/o capital gains) 7,021 8,181 (1,160) (14.2) 8,943
Net extraordinary capital gains and provisions (1) (1,670) — (1,670) — —
Attributable profit to the Group 5,351 8,181 (2,830) (34.6) 8,943
EPS (euros) 0.6018 0.9418 (0.3400) (36.1) 1.0454
Diluted EPS (euros) 0.5974 0.9356 (0.3382) (36.1) 1.0382
Pro memoria:
Average total assets 1,228,382 1,190,361 38,021 3.2 1,099,018
Average shareholders' equity 74,901 69,334 5,567 8.0 64,335
(1) In 2009 extraordinary capital gains and extraordinary provisions for the same amount are included, and thus the net amount is zero.
84 ANNUAL REPORT 2011

8. • The impact of the exchange rates of various currencies against • Net interest income rose 5.5% to EUR 30,821 million. This
the euro was not very significant at around one percentage was due to the net impact of several factors.
point negative in comparing revenues and costs with 2011. In
the UK and Latin America, the impact was one percentage – There was a positive effect from the moderate increase in
point negative and in Sovereign five percentage points volumes and the improvement in the spreads on loans for
negative. the whole Group (from 3.64% to 3.89%).
• Lastly, there is a positive impact of around three or four points – Spreads on deposits which compared negatively in the first
in revenues and costs from the change in perimeter. This half of the year, are already at the same levels (0.28% in
impact is the net effect of the entry into consolidation of Bank 2010 and 0.29% in 2011).
Zachodni WBK, AIG in Poland and SEB in Germany (Santander
– Negative impact from the higher cost of wholesale funding
Retail) and lower revenues from insurance business, as the
and the greater regulatory requirements for liquidity in
operation with Zurich Financial Services was closed in the
some countries, mainly the UK.
fourth quarter.
• Net fee income increased 7.6%, with a favourable
The performance of the income statement and comparisons
performance of those from insurance and services. The latter
with 2010 was as follows:
showed rises in almost all lines: cards, demand deposits, etc.
Basic revenues (net interest income, fee income and insurance On the other hand, income from securities and custody was
results) amounted to EUR 41,685 million, 6.0% more than in lower and virtually unchanged from mutual and pension
2010 (+4.8% excluding the perimeter and exchange rate funds.
effects).
Quarterly
Million euros
2010 2011
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Net interest income 7,122 7,378 7,396 7,329 7,514 7,638 7,700 7,969
Dividends 47 144 60 111 40 193 60 101
Income from equity-accounted method 3 5 5 4 5 5 6 40
Net fees 2,326 2,483 2,481 2,445 2,595 2,729 2,694 2,454
Gains (losses) on financial transactions 724 567 599 715 657 722 639 482
Other operating income/expenses 38 38 22 9 41 (2) 18 (38)
Gross income 10,260 10,614 10,563 10,613 10,852 11,285 11,117 11,008
Operating expenses (4,263) (4,548) (4,687) (4,698) (4,824) (4,908) (4,994) (5,164)
General administrative expenses (3,812) (4,070) (4,206) (4,168) (4,314) (4,380) (4,456) (4,631)
Personnel (2,182) (2,317) (2,408) (2,421) (2,521) (2,550) (2,611) (2,644)
Other general administrative expenses (1,629) (1,753) (1,798) (1,746) (1,792) (1,830) (1,845) (1,987)
Depreciation and amortisation (451) (478) (481) (531) (510) (528) (538) (534)
Net operating income 5,997 6,066 5,876 5,915 6,029 6,377 6,123 5,843
Net loan-loss provisions (2,436) (2,483) (2,935) (2,404) (2,188) (2,684) (2,906) (2,785)
Impairment losses on other assets (57) (63) (41) (310) (48) (52) (84) 11
Other income (331) (362) (364) (16) (550) (1,379) (361) (531)
Profit before taxes (w/o capital gains) 3,173 3,158 2,535 3,186 3,243 2,262 2,773 2,538
Tax on profit (734) (680) (634) (874) (888) (636) (778) (634)
Profit from continuing operations (w/o capital gains) 2,439 2,477 1,901 2,311 2,355 1,627 1,995 1,904
Net profit from discontinued operations (12) (1) (4) (10) (6) (0) (15) (3)
Consolidated profit (w/o capital gains) 2,427 2,476 1,897 2,301 2,349 1,626 1,980 1,901
Minority interests 212 246 262 201 241 234 177 184
Attributable profit to the Group (w/o capital gains) 2,215 2,230 1,635 2,101 2,108 1,393 1,803 1,717
Net extraordinary capital gains and provisions — — — — — — — (1,670)
Attributable profit to the Group 2,215 2,230 1,635 2,101 2,108 1,393 1,803 47
EPS (euros) 0.2553 0.2574 0.1884 0.2408 0.2382 0.1569 0.2030 0.0037
Diluted EPS (euros) 0.2537 0.2558 0.1854 0.2406 0.2364 0.1558 0.2007 0.0045
ANNUAL REPORT 2011 85

9. Net interest income As regards the rest of revenues, dividends collected amounted
Million euros to EUR 394 million (EUR 362 million in 2010), while income
accounted for by the equity method was EUR 57 million, up
+ 5.5% 2011-2010 from EUR 17 million in 2010. This increase benefited from the
recording in the fourth quarter of insurance business in Latin
America.
30,821
29,224
Total gross income was EUR 44,262 million (EUR 42,049
26,299 million in 2010), 5.3% more than in 2010 (+4.0% excluding the
perimeter and exchange rate effects).
Operating expenses rose 9.3% and 6.8% excluding the
perimeter and exchange rate effects. The year-on-year
performance varied throughout the Group, depending on the
environment and strategy followed in each unit.
2009 2010 2011
In Europe, both the large retail units (Santander Branch Network,
Banesto and Portugal) as well as the UK recorded falls in expenses
in real terms. Of note were the reductions of 2.5% at Banesto,
Net fees 2.1% in Portugal and 1.2% in the Santander Branch Network.
Million euros
The global units (GBM and Asset Management and Insurance)
+ 7.6% 2011-2010 registered higher growth in expenses (+4.1%) because of
investments in equipment and technology with the double
purpose of strengthening the positions attained in key markets
10,471
and businesses in previous years, and developing new initiatives.
9,734
Moreover, there is also an increase in expenses resulting from
9,080
the incorporation of new entities, mainly Bank Zachodni WBK in
Poland and SEB in Germany.
In Latin America, costs also rose due to the drive in new
commercial projects, the increase in installed capacity, the
restructuring of points of attention, particularly in Brazil, and the
2009 2010 2011 revision of collective bargaining agreements in an environment
of higher inflation. Sovereign also registered single digit growth
in costs.
Net operating income (pre-provision profit) was EUR 24,373
• Results from insurance activity were 3.9% higher at EUR million, 2.2% more than the EUR 23,853 million registered in
393 million (EUR 378 million in 2010) and were affected by 2010.
the completion of the operation with Zurich Financial Services,
which meant reduced revenues in the fourth quarter. Net operating income was particularly noteworthy as it set a
new record. It rose for the ninth year running and exceeded EUR
Gains on financial transactions dropped 4.1%, due to the 24,000 million for the first time, placing Santander among the
net impact of two factors. On the one hand, the reduced best banks in the world for its profit generation capacity.
revenues from the operating areas, mostly GBM (Global Banking
and Markets), which were weak in the last three quarters of The efficiency ratio was 44.9% with amortisations and 40.2%
2011, very affected by the environment, compared to strong without amortisations (43.3% and 38.7%, respectively, in 2010).
results in 2010, mainly in the first half of the year. On the other
hand, Corporate Activities registered profits in hedging of
exchange rates in 2011 as against losses in 2010.
Gains on financial transactions as a proportion of total revenues
dropped from 6.2% in 2010 to 5.6% in 2011.
Net fees
Million euros
Variation
2011 2010 amount % 2009
Fees from services 6,171 5,632 538 9.6 5,267
Mutual & pension funds 1,236 1,267 (31) (2.4) 1,178
Securities and custody 668 784 (117) (14.9) 774
Insurance 2,397 2,051 346 16.9 1,861
Net fee income 10,471 9,734 737 7.6 9,080
86 ANNUAL REPORT 2011

10. This performance showed the Group’s capacity to continue to Gross income and expenses
generate revenues in a difficult context and comfortably absorb Billion euros
the provisions made for loan losses, which at EUR 10,562
million were 3.0% more than in 2010. This increase was due to Gross income
the reduced release of generic provisions, as based on just Expenses
specific ones there was a decline of 9.8%.
44.3
Similar comments can be made for Spain, where total provisions
42.1
rose 13.6% and specific ones dropped 32.0%. There were
39.4
significant reductions in provisions in the UK, Sovereign and
Santander Consumer Finance (even with the incorporation of
19.9
new units). Provisions in Latin America excluding Brazil also
18.2
dropped. However, they rose strongly in Portugal, reflecting the
16.4
economic difficulties, and in Brazil because of the greater
growth in lending of around 20% and an increase in the
sector’s NPLs in previous quarters.
2009 2010 2011
Net operating income after provisions was EUR 13,811
million, 1.6% more than in 2010 (+1.1% excluding the
perimeter and exchange-rate impacts). Net operating income
Billion euros
There were notable rises in these results in Santander
Consumer Finance (+46.8%), Sovereign (+33.6%) and almost + 2.2% 2011-2010
all Latin American units such as Brazil (+2.9%), Mexico
(+12.4%), Argentina (+8.2%), Puerto Rico (+42.4%) and
Colombia (+43.1%). On the other hand there were declines in
24.4
23.9
the UK (-8.4%), after absorbing the significant effects of the
23.0
regulatory changes, as commented on in greater detail in the
relevant section. There were larger falls in Spain (-30.4%) and
Portugal (-56.2%).
Asset impairment losses and other results were EUR 2,995
million negative compared to EUR 1,543 million, also negative,
in 2010, largely due to the charge made in the second quarter
for EUR 842 million gross for payment protection insurance (PPI) 2009 2010 2011
remediation in the UK.
Profit before tax was 10.2% lower at EUR 10,817 million
After deducting the tax charge profit from continued
(excluding the perimeter and exchange rate effects: -10.6% ).
operations was EUR 7,881 million (-13.7%). Recurring
The tax charge of EUR 2,936 million was almost the same as in
attributable profit, after incorporating discontinued operations
2010, mainly due to a higher rate in Brazil, Sovereign and
and minority interests, was EUR 7,021 million (-14.2%).
Corporate Activities.
Operating expenses
Million euros
Variation
2011 2010 amount % 2009
Personnel expenses 10,326 9,330 996 10.7 8,450
General expenses 7,455 6,926 528 7.6 6,374
Information technology 875 798 77 9.7 786
Communications 659 670 (12) (1.7) 632
Advertising 695 634 62 9.7 594
Buildings and premises 1,667 1,553 114 7.4 1,405
Printed and office material 178 178 (0) (0.2) 209
Taxes (other than profit tax) 401 376 25 6.5 313
Other expenses 2,980 2,718 263 9.7 2,436
Personnel and general expenses 17,781 16,256 1,525 9.4 14,825
Depreciation and amortisation 2,109 1,940 169 8.7 1,596
Total operating expenses 19,889 18,196 1,694 9.3 16,421
ANNUAL REPORT 2011 87

11. Net loan-loss provisions
Million euros
Variation
2011 2010 amount % 2009
Non performing loans 12,368 11,457 911 7.9 10,516
Country-risk (7) 2 (9) — (117)
Recovery of written-off assets (1,800) (1,201) (598) 49.8 (915)
Total 10,562 10,258 304 3.0 9,484
Moreover, and as it was already commented on, the bank made
Profit before tax
Million euros
provisions for EUR 3,183 million net of tax, of which EUR 1,513
million came from capital gains and EUR 1,670 million from
-10.2% 2011-2010 fourth quarter profits. After these impacts, attributable profit
was EUR 5,351 million.
Earnings per share were EUR 0.6018, 36.1% less than in
2010 and slightly affected by the capital increases in 2011 to
12,052
11,764
convert Valores Santander (convertible bonds) and tend to the
10,817
remuneration in shares for those shareholders that chose this
option, as no adjustment was made retroactively to the number
of shares of previous periods.
The Group's ROE was 7.14% and ROTE (measured as
attributable profit / shareholders equity less goodwill) was
2009 2010 2011 10.81% (9.37% and 14.18%, respectively, on the basis of
recurring attributable profit).
Attributable profit to the Group
Million euros
-34.6% 2011-2010
8,943
8,181
5,351
2009 2010 2011
Extraordinary capital gains and provisions
(net of tax) Million euros
-3,183
Impact on Funds established
attributable profit:
before tax
-1,670 million
-1,670 Not required Spain real estate 1,812
1,513 Portugal goodwill 601
Sale of Insurance
Holding Latam 641 Amortisation of intangibles,
-893
pensions and other
SCF USA
872 -620 Portfolio writedowns
transaction
capital gains* provisions
(*) Not including capital gains from agreement to sell the bank in Colombia, which are to be registered in 2012
88 ANNUAL REPORT 2011

12. Balance sheet
Million euros
Variation
2011 2010 amount % 2009
Assets
Cash on hand and deposits at central banks 96,524 77,785 18,739 24.1 34,889
Trading portfolio 172,637 156,762 15,875 10.1 135,054
Debt securities 52,704 57,871 (5,168) (8.9) 49,921
Customer loans 8,056 755 7,301 966.7 10,076
Equities 4,744 8,850 (4,107) (46.4) 9,248
Trading derivatives 102,498 73,069 29,429 40.3 59,856
Deposits from credit institutions 4,636 16,216 (11,581) (71.4) 5,953
Other financial assets at fair value 19,563 39,480 (19,917) (50.4) 37,814
Customer loans 11,748 7,777 3,971 51.1 8,329
Other (deposits at credit institutions, debt securities
and equities) 7,815 31,703 (23,888) (75.4) 29,485
Available-for-sale financial assets 86,612 86,235 378 0.4 86,621
Debt securities 81,589 79,689 1,900 2.4 79,289
Equities 5,024 6,546 (1,522) (23.3) 7,331
Loans 779,525 768,858 10,667 1.4 736,746
Deposits at credit institutions 42,389 44,808 (2,419) (5.4) 57,641
Customer loans 730,296 715,621 14,675 2.1 664,146
Debt securities 6,840 8,429 (1,589) (18.9) 14,959
Investments 4,154 273 3,881 — 164
Intangible assets and property and equipment 16,840 14,584 2,257 15.5 11,774
Goodwill 25,089 24,622 466 1.9 22,865
Other 50,580 48,901 1,679 3.4 44,602
Total assets 1,251,525 1,217,501 34,024 2.8 1,110,529
Liabilities and shareholders' equity
Trading portfolio 146,949 136,772 10,177 7.4 115,516
Customer deposits 16,574 7,849 8,725 111.2 4,658
Marketable debt securities 77 365 (288) (78.8) 586
Trading derivatives 103,083 75,279 27,804 36.9 58,713
Other 27,214 53,279 (26,064) (48.9) 51,559
Other financial liabilities at fair value 44,908 51,020 (6,111) (12.0) 42,371
Customer deposits 26,982 27,142 (160) (0.6) 14,636
Marketable debt securities 8,185 4,278 3,907 91.3 4,887
Due to central banks and credit institutions 9,741 19,600 (9,859) (50.3) 22,848
Financial liabilities at amortized cost 935,669 898,969 36,700 4.1 823,403
Due to central banks and credit institutions 116,368 79,537 36,832 46.3 73,126
Customer deposits 588,977 581,385 7,593 1.3 487,681
Marketable debt securities 189,110 188,229 880 0.5 206,490
Subordinated debt 22,992 30,475 (7,482) (24.6) 36,805
Other financial liabilities 18,221 19,343 (1,122) (5.8) 19,300
Insurance liabilities 517 10,449 (9,932) (95.1) 16,916
Provisions 15,571 15,660 (89) (0.6) 17,533
Other liability accounts 25,052 23,717 1,335 5.6 20,919
Total liabilities 1,168,666 1,136,586 32,080 2.8 1,036,659
Shareholders' equity 80,895 77,334 3,562 4.6 71,832
Capital stock 4,455 4,165 290 7.0 4,114
Reserves 72,660 66,258 6,402 9.7 61,071
Attributable profit to the Group 5,351 8,181 (2,830) (34.6) 8,943
Less: dividends (1,570) (1,270) (300) 23.6 (2,297)
Equity adjustments by valuation (4,482) (2,315) (2,166) 93.6 (3,165)
Minority interests 6,445 5,896 549 9.3 5,204
Total equity 82,859 80,914 1,944 2.4 73,871
Total liabilities and equity 1,251,525 1,217,501 34,024 2.8 1,110,529
ANNUAL REPORT 2011 89

13. Total managed funds at the end of 2011 amounted to EUR
Grupo Santander. Balance sheet 1,382,980 million, of which 90%, EUR 1,251,525 million, were
on-balance sheet and the rest off-balance sheet mutual and
Activity continued to reflect the market context: pension funds and managed portfolios.
• Lower demand for loans in Europe, especially in Two factors need to be taken into account in the year-on-year
Spain and Portugal, and double-digit growth in comparisons:
Latin America.
• A slightly positive perimeter impact from the net effect of the
• In funds, preference for deposits and conservative following changes in the Group’s composition:
policy in issues.
– Positive impact from the consolidation of Banco Zachodni
• Loan-to-deposit ratio of 117% (150% at the start WBK in Poland, the incorporation to the Group in 2011 of
of the crisis). SEB’s retail banking business in Germany (Santander Retail)
Core capital ratio (BIS II) of 10.02%, after rising for into Santander Consumer Finance and the acquisition of GE
the fifth year running. Capital Corporation's mortgage portfolio in Mexico and of
Creditel in Uruguay.
The European Banking Authority’s target has – Negative impact from Santander Consumer USA, which in
already been reached: core capital ratio of 9.01%. December stopped consolidating by global integration and
moved to consolidation by the equity accounted method,
Shareholders’ equity per share increased again to and Latinoamerica’s bancassurance business.
EUR 8.62.
• The second effect came from the appreciation/depreciation of
various currencies against the euro (end of period rates). Both
the dollar and sterling appreciated by 3%, while the main
Distribution of total assets by geographic segment Latin American currencies depreciated: Brazilian real and
December 2011 Mexican peso (8%); Chilean peso (7%) and the Argentine
peso (5%). The net impact of both is virtually zero.
Sovereign 5% Other 5% The joint impact of the two effects on changes in customer
Other Latin America 3% balances was minimal (less than one percentage point positive),
Chile 3% Spain 27%
both on lending as well as managed customer funds.
Mexico 3% Lending
The Group’s customer loans amounted to EUR 769,036 million,
Brazil 13% 3.4% higher than in 2010. Eliminating the exchange rate and
perimeter effects it was 3.0% higher.
Portugal 4%
Germany 3% The geographic distribution (principal segments) was also very
Retail Poland 1% different by markets.
Other
Europe 5%
United Kingdom 28%
Customer loans
Million euros
Variation
2011 2010 amount % 2009
Public sector 12,147 12,137 10 0.1 9,803
Other residents 202,411 217,497 (15,086) (6.9) 222,355
Commercial bills 9,679 11,146 (1,466) (13.2) 11,134
Secured loans 117,946 127,472 (9,526) (7.5) 125,397
Other loans 74,785 78,879 (4,094) (5.2) 85,824
Non-resident sector 554,478 514,217 40,262 7.8 468,267
Secured loans 342,676 311,048 31,627 10.2 286,381
Other loans 211,802 203,168 8,634 4.2 181,886
Gross customer loans 769,036 743,851 25,185 3.4 700,424
Loan-loss allowances 18,936 19,697 (761) (3.9) 17,873
Net customer loans 750,100 724,154 25,946 3.6 682,551
Pro memoria: Doubtful loans 31,287 27,908 3,379 12.1 24,027
Public sector 102 42 60 142.0 18
Other residents 14,745 12,106 2,639 21.8 9,898
Non-resident sector 16,439 15,759 680 4.3 14,111
90 ANNUAL REPORT 2011

14. In Continental Europe, Spain and Portugal’s lending fell by Gross customer loans
4.6% and 5.6%, respectively, due to deleveraging. Santander Billion euros
Consumer Finance’s lending dropped 4.8%, due to the impact
of the consolidation by the equity accounted method of + 3.4%* 2011-2010
Santander Consumer USA in December 2011 (+16.1% before * Excluding exchange rate impact: +3.8%
this impact). The incorporation of Bank Zachodni WBK increased
769
the Group’s net lending by EUR 8,479 million.
744
Gross customer loans in Spain amounted to EUR 225,288
700
million, with the following structure:
• Loans to the public sector amounted to EUR 12,147 million,
(+0.1%).
• Lending to individuals amounted to EUR 84,816 million, of
which EUR 58,535 million were mortgages for homes. These 2009 2010 2011
are the healthiest part and with the least risk of further
deterioration of the portfolio in Spain because of the different
features of this product compared to similar ones in other
countries. For example, the principle is amortised as of the Gross customer loans
first day, the borrowers' responsibility extends to all their % o/ operating areas. December 2011
assets and almost all loans are for residences in ownership,
with a very low expected loss. Sovereign 5%
Other Latin America 2%
In the specific case of Grupo Santander, the portfolio is mostly Chile 3%
Mexico 3%
composed of mortgages that are for the first residence, with
large concentration of loans in the lowest tranches of loan-to- Spain 29%
Brazil 11%
value (88% with an LTV lower than 80%) and the NPL ratio is
very low (2.7%).
• Loans to SMEs and companies without real estate purpose,
the most relevant part of the lending portfolio, amounted to Portugal 4%
EUR 104,883 million and accounted for 47% of the total. Of
Germany 4%
note was the stability shown during the year (-0.4%) within Retail Poland 1%
an environment of widespread reduction of lending in the United Kingdom 34% Other
whole system. Europe 4%
• Loans for real estate purposes (with the greatest risk) stood at
EUR 23,442 million, after falling in every quarter of 2011. The
total reduction for the year was EUR 3,892 million (-14.2%).
Loan portfolio in Spain
Billion euros
The Group maintained in the year the strategy of previous
years to reduce exposure to this segment of greater risk. The
245
total reduction in the last three years amounts to EUR 14,246 Total 236
225
million (-37.8%). Public Sector 10
12
In Portugal, the fall in lending (5.6%) came from all segments: Household mortgages 64
12
-11.8% to SMEs, -13.9% to companies and -3.1% to 61
59
individuals. In addition, balances in construction and real Other loans to individuals 31
30
estate, which represent only 3.6% of lending in the country, 26
declined 12.1% in 2011.
Companies without real
Santander Consumer Finance’s lending, after the operation at estate purpose
108 105
105
Santander Consumer USA, dropped 4.8%. Excluding this
impact, growth was 16.1% due to organic growth plus SEB’s
integration in Germany. New lending rose 11.1%. Real estate purpose 31 27 23
2009 2010 2011
ANNUAL REPORT 2011 91

15. Credit risk management*
Million euros
Variation
2011 2010 amount % 2009
Non-performing loans 32,036 28,522 3,514 12.3 24,554
NPL ratio (%) 3.89 3.55 0.34 p. 3.24
Loan-loss allowances 19,661 20,748 (1,087) (5.2) 18,497
Specific 15,474 14,901 572 3.8 11,770
Generic 4,187 5,846 (1,659) (28.4) 6,727
NPL coverage (%) 61 73 (11 p.) 75
Credit cost (%) ** 1.41 1.56 (0.15 p.) 1.57
Ordinary non-performing and doubtful loans *** 18,318 18,061 257 1.4 17,641
NPL ratio (%) *** 2.26 2.28 (0.02 p.) 2.35
NPL coverage (%) *** 107 115 (8 p.) 105
* Excluding country-risk
** Net specific allowance / computable assets
*** Excluding mortgage guarantees
Note: NPL ratio: Non-performing loans / computable assets
In the United Kingdom, the balance of customer loans was Bad and doubtful loans amounted to EUR 32,036 million,
4.6% higher. In local criteria, the stock of residential mortgages, 12.3% more than in 2010.
in a still depressed market, were very stable, while loans to SMEs
increased 25.4%, gaining further market share. Personal loans, The Group’s NPL ratio was 3.89% at the end of 2011 (+34 b.p.),
reflecting the policy in the last few years of reducing them, but it only rose by 11 b.p. in the second half of the year (+3 b.p.
declined 12.7%. in the fourth quarter).
Lending in Latin America increased 17.9% excluding the In order to cover these loans, total loan-loss provisions
exchange rate impact, due to organic growth and the amounted to EUR 19,661 million, of which 21% (EUR 4,187
incorporation of GE Capital Corporation's mortgage portfolio in million) were generic provisions.
Mexico and of Creditel in Uruguay. Loans in local currency rose
Since the end of 2008, total loan-loss provisions have increased
20.3% in Brazil, 7.3% in Chile and 30.9% in Mexico (+22.4%
by EUR 6,800 million (+53%), reflecting the efforts made in the
excluding the perimeter impact).
last three years. The Group’s NPL coverage is 61%, negatively
Sovereign’s loans rose 6.0% in dollars, due to the 4.5% affected by some 3 percentage points because of the operation
increase in the most attractive mortgage segments (residential at Santander Consumer USA.
and multifamily), and the acquisition of a consumer credit
The NPL ratios by units and countries are set out below:
portfolio from GE. Both effects comfortably offset the exit from
higher risk segments and from those not considered strategic • The NPL ratio in Spain is 5.49%, well below the sector’s
for the Group. average, and coverage 45% (4.24% and 58%, respectively, in
2010).
Continental Europe accounted for 42% of the Group’s total
lending (29% Spain), the UK 34%, Latin America 19% (11%
Brazil) and Sovereign 5%. These percentages in 2010 were 45%
for Continental Europe (32% Spain), 32% the UK, 18% Latin Loan-loss allowances
America (10% Brazil) and 5% (Sovereign). Million euros
Risks -5.2% 2011-2010
20,748
The still weak scenario in some markets continued to push up
19,661
18,497
non-performing loans, linked both to the rise in bad and
doubtful loans (the numerator) as well as the slower growth in
lending (denominator), which in some cases were declines. 5,846 4,187
Generic 6,727
Despite this, the active management of risk is reflected in a
slower pace of growth in the Group’s NPLs in the last few 15,474
14,901
quarters. Specific 11,770
The Group's annual risk premium was 1.67% at December
2011, well below the maximum of 2.47% reached in the third 2009 2010 2011
quarter of 2009.
92 ANNUAL REPORT 2011

16. Around 90% of the portfolio (including mortgages and
Non-performing loans
companies) has an NPL ratio of 3.3%. The ratio for mortgages Million euros
to buy homes is 2.7% and 3.5% for the rest of the portfolio
(public sector, individual customers and companies without 2011 2010 2009
real estate purposes). In both cases, NPLs increased
moderately. Balance at beginning of period 28,522 24,554 14,191
Net additions 15,381 13,478 18,234
The rise in the total ratio was thus due to loans with a real Increase in scope of consolidation 925 257 1,033
estate purpose (ratio of 28.6%). This ratio reflects, on the one Exchange differences (362) 1,147 890
hand, the greater NPLs in this segment and, on the other, the Write-offs (12,430) (10,913) (9,795)
Group’s anticipative policy to sharply reduce balances in this Balance at period-end 32,036 28,522 24,554
segment.
Doubtful loans with a real estate purpose amounted to EUR
6,772 million. Their coverage rose by 4.p.p. to 33%.
Another EUR 3,916 million was recorded as substandard, all NPL ratio
of which is up-to-date with payments. These balances are %
16% covered (+ 4 p.p.).
The gross balance of foreclosed properties at the end of 2011
was EUR 8,552 million, and after the provisions made in the
fourth quarter of the year coverage rose to 50% from 31% in
2010. 3.89
3.86
3.78
These coverage levels signify that Santander has already 3.55
3.61
anticipated a significant part of the new requirements
outlined in the Royal Decree 2/2012, which came into force
on February 3, 2012 and will be entirely met during the year,
through the existing capital buffer, ordinary contributions to
provisions and applying the capital gains which may be
Dec’10 Mar’11 Jun’11 Sep’11 Dec’11
obtained during the year (including EUR 900 million from the
capital gain obtained from the sale of Banco Santander
Colombia).
• Portugal’s NPL ratio rose 116 b.p. to 4.06%, using the
Group’s criteria, while coverage was 55%, 5 p.p. less than in NPL ratio in Spain
2010. In local criteria, Santander Totta has a lower NPL ratio %
than its competitors.
• Santander Consumer Finance reduced its NPL ratio for the 28.6 Real estate purpose
sixth quarter running to 3.77%, with coverage of 113%. The 17.0
evolution during the year was determined by the
consolidation in December of Santander Consumer USA by
11.1
the equity accounted method as, without this effect, coverage
was 9 p.p. higher.
• In the UK the NPL ratio was 1.86%, slightly higher than in 4.2 5.5 Total portfolio Spain
2010 (+10 b.p.), while coverage was 38% (46% in 2010).
3.4 3.1 3.5 Other portfolio
Because of its importance in the Group’s overall lending, the 2.5 2.7 Household mortgages
2.2
NPL ratio of mortgages was 1.46% (1.41% in 2010), while 2.4
the average loan-to-value was 53%.
2009 2010 2011
Another indicator of this portfolio’s good performance is the
small volume of foreclosed homes (EUR 160 million, or only
0.07% of total mortgage lending portfolio). Efficient
management of these cases and a dynamic market for this
kind of housing enable sales to be made in a short period,
contributing to the good results.
ANNUAL REPORT 2011 93

17. • Brazil’s NPL ratio was 5.38% (+47 b.p.). This increase was due Customer funds under management
to the small rise in the sector and to higher growth in lending Total managed funds amounted to EUR 984,353 million,
to individuals, basically consumer credit and cards. Santander almost the same as in 2010 (-0.1%). After deducting the
Brazil’s performance was better than that of the country’s perimeter and forex effects, which had a marginal impact, the
other private sector banks, the most comparable collective. reduction was 0.8%.
Coverage was 95%.
Customer deposits rose 2.6% and 4.5% including retail
• The NPL ratio of Latin America ex-Brazil was 2.89% and commercial paper in Spain and Brazil’s letras financeiras.
coverage an excellent 102%. Its comparison is affected by the Mutual and pension funds declined 9.8%, affected by the
incorporation in the second quarter of GE Capital greater focus on capturing on-balance sheet funds.
Corporation's mortgage portfolio in Mexico. Excluding it, the
ratio improved in every quarter of 2011 (-25 b.p. for the Deposits in Continental Europe were very similar to 2010 at
whole year), while coverage was 104% (-6 p.p.). EUR 49,400 million (-0.1%) and 25.0% higher than at the end
of 2009. This reflected the strong campaign in 2010, a large
• Sovereign’s NPL ratio, after declining in the last eight quarters, part of which was retained in 2011. To this is added the
was 2.85%, much better than the 4.61% in 2010 (-176 b.p.). favourable impact of the entities incorporated to the Group.
Coverage was 96% (+21 p.p.).
• In Spain, the strategy followed in the renewal of funds
Lastly, specific loan-loss provisions for the whole Group, after captured in the 2010 campaign was to give priority to
deducting write-offs recovered, amounted to EUR 11,137 improved costs over volumes. As a result, deposits fell 7.2%.
million (1.41% of average credit risk in the last 12 months), However, if one compares the balances at the start of the
down from EUR 12,342 million in 2010 (1.56%). campaign with those at the end of 2011, growth was more
than EUR 18,800 million (+12.1%). To this is added, the retail
Net provisions represented 1.4% of loans, well below the 3.3% commercial paper sold during the year, which made the
represented by net operating income/lending. changes -4.0% for 2011 and +16.0% for the last two years.
This policy of emphasis on balance sheet funds was reflected
Further information on the evolution of credit risk, particularly
in a fall in mutual funds.
real estate risk in Spain, control and monitoring systems and
internal risk models to calculate provisions is included in the
section on Risk Management in this annual report.
Customer funds under management
Million euros
Variation
2011 2010 amount % 2009
Public sector 6,528 9,655 (3,127) (32.4) 13,293
Other residents 165,095 161,096 3,999 2.5 126,189
Demand deposits 68,389 67,077 1,312 2.0 61,000
Time deposits 61,185 81,145 (19,960) (24.6) 49,177
REPOs 35,520 12,873 22,647 175.9 16,012
Non-resident sector 460,911 445,625 15,286 3.4 367,495
Demand deposits 220,299 210,490 9,808 4.7 195,823
Time deposits 197,249 197,590 (341) (0.2) 148,485
REPOs 33,275 30,623 2,652 8.7 18,403
Public Sector 10,089 6,922 3,167 45.7 4,784
Customer deposits 632,533 616,376 16,158 2.6 506,976
Debt securities 197,372 192,872 4,499 2.3 211,963
Subordinated debt 22,992 30,475 (7,482) (24.6) 36,805
On-balance-sheet customer funds 852,898 839,723 13,175 1.6 755,744
Mutual funds 102,611 113,510 (10,898) (9.6) 105,216
Pension funds 9,645 10,965 (1,320) (12.0) 11,310
Managed portfolios 19,199 20,314 (1,115) (5.5) 18,364
Savings-insurance policies — 758 (758) (100.0) 9,422
Other customer funds under management 131,456 145,547 (14,091) (9.7) 144,313
Customer funds under management 984,353 985,269 (916) (0.1) 900,057
94 ANNUAL REPORT 2011